Regulators to Finalize Long-Awaited Risk Retention Rule

Regulators will unveil a long-awaited final rule next week that requires lenders to retain some of the risk for loans they securitize, a critical part of the Dodd-Frank Act that the agencies have struggled to implement.

The Federal Reserve Board announced Wednesday it will meet in open session on Oct. 22 to discuss the final risk retention rule, which includes an exemption for loans defined as "qualified residential mortgages."

The 2010 financial reform law required securitizers to retain 5% of the credit risk of loans they sell into the secondary market, but gave the agencies the power to define an ultra-safe class of loans — QRM — that were exempt from risk retention.

Regulators first tried to define QRM in 2011, but that plan, which would have required borrowers to make a 20% down payment, among other requirements, was vigorously opposed by the financial industry. A second stab at a proposal was unveiled in August of last year, removing the controversial down payment requirement.

The 2013 plan has been criticized, however, because it would grant QRM status to a large swath of the mortgage market, essentially defeating the purpose of creating an ultra-safe class of loan.

THe risk retention rules will apply to securitizations of other asset classes, including collateralized loan obligations. Loan market participants have been lobbying for an exception for less risky loans to below investment grade companies that would be exempt from the rules, similar to QRM.

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